Clash or compromise near on Iraqi-Kurdish-Turkish oil dispute

ARBIL/BAGHDAD/ANKARA (Reuters) - A headlong collision across Middle East fault lines is drawing close as Turkey, Iraq and ethnic Kurds who run their own region in between wrangle over oil exports.

Time is running out as more oil flows through a new pipeline from Iraqi Kurdistan for export from Turkey, in defiance of Baghdad, which has threatened to punish both Ankara and Arbil for "smuggling" oil out of Iraq.

Talks have borne little fruit and, with the Kurds seeking buyers for the oil from their autonomous territory thanks to an agreement with Turkey signed in November, Ankara will soon be forced to take sides.

"Turkey must now choose either to turn its back on Baghdad and go ahead with its deal with the Kurds, or suspend direct exports from the region until an agreement is reached between the central government and Arbil," said a senior Iraqi official who asked not to be named.

"Unfortunately, facts on the ground show that Ankara eventually will go ahead with their deals with the Kurds at the expense of their relations with Baghdad."

Oil traders expect at least one symbolic cargo of the oil to be exported by the end of the month, preferably with Baghdad's consent, but without it otherwise.

"That will put additional pressure on Baghdad to negotiate with a sense of urgency," said a Kurdistan-based industry source on condition of anonymity. "We always thought that it (the pipeline) would be the catalyst for the initiation of serious discussion and resolution of the export problem."

Behind the scenes, and the hotter rhetoric, the private voices in Baghdad and Arbil are, however more united - but in pessimism that an enduring compromise can be found to a dispute that has strained Iraq's federal unity.

If a deal is elusive, the Kurds retain some powerful political cards to play in the formation of any Iraqi government after elections at the end of April. Equally, Baghdad could cut funding to the northern enclave.

Kurdish officials are positive Ankara will stand by them and publicly say they are hopeful a bargain can be struck with Baghdad, but in private admit their differences are almost insurmountable.

The latest round of talks ended inconclusively in Baghdad on Sunday. Iraq's Deputy Prime Minister for Energy Hussein al-Shahristani is due to visit the Kurdish capital Arbil for further negotiations in the coming days, although no date has been formally announced.

Turkey has sought to stay above the fray.

"We have repeatedly said, these are decisions that they will make among themselves," Turkish Energy Minister Taner Yildiz told reporters. "I believe our brothers will meet at a good point."

Ankara may want to see a formal agreement in place before allowing continuous exports from the region, but industry sources there are skeptical any deal would hold.

"Turkey has come to a point where it has to take extra care," said one. "I don't see a lasting solution... but there could well be a temporary arrangement so that the pressure in the system can be relieved, at least in the interim."

BARGAINING IN BAGHDAD

Autonomous since 1991, Kurdistan has often chafed against central authority, and even raised the prospect of secession from Iraq, but is nonetheless reliant on Baghdad for a slice of the OPEC producer's $100 billion-plus budget.

Baghdad has warned it will sever that lifeline if the Kurds exports oil without its consent. The Iraqi cabinet this month approved a draft budget for 2014 that would slash the region's share of state revenues unless it exports 400,000 barrels of crude per day via State Oil Marketing Organisation (SOMO).

That is well above Kurdistan's current export capacity of around 255,000 bpd, industry sources say.

Officials in the region are confident the budget will not pass in parliament because most Sunni lawmakers are boycotting the assembly, and a Kurdish walkout would likely prevent a quorum.

Nonetheless, they are considering their options should it come to that.

"If Baghdad cuts the budget as they threatened, then Kurdistan has a lot of cards to play," said a senior official in Arbil on condition of anonymity. "Not allowing the flow of oil from Kirkuk to Ceyhan is one of them."

It is not clear how the Kurds would prevent pipeline oil flowing from the Kirkuk oilfields to Turkey's Mediterranean port of Ceyhan, but a stretch of it runs through their territory.

Another less provocative option would be to twist Iraqi Prime Minister Nuri al-Maliki's arm before a parliamentary election due on April 30, in which he will need Kurdish support to win a third term or form a government.

"The threats being made today only demonstrate that oil disputes are most likely going to be on the negotiating table between Kurdish and Arab parties when forming the next government," said Ramzy Mardini, nonresident fellow at the Atlantic Council.

TURKISH GAME PLAN

For Turkey, Kurdish oil will help diversify its energy supplies away from Russia and Iran and reduce a ballooning $60 billion energy bill, but the motive for better ties goes beyond hydrocarbons.

"Turkey's interest in the KRG is driven as much by geopolitics... as it is by Turkey's energy needs," said Soner Cagaptay, director of the Turkish Research Program at The Washington Institute.

Co-operating with the Kurdistan Regional Government (KRG) gives Ankara additional sway over politics in Baghdad, and the relatively stable region serves as a buffer to insulate Turkey's southeastern corner against instability in the rest of Iraq.

Ankara is also counting on the KRG to help it make peace with the Kurdistan Workers Party (PKK) rebel group, which has fought a three-decade war against it, at a cost of more than 40,000 lives on both sides.

Some PKK guerillas have withdrawn from Turkey to their bases in the mountains of Iraqi Kurdistan as part of a peace process set in motion last year.

Ankara's new approach to the Kurds was stated plainly by the Turkish foreign minister in a conversation with former U.S. army chief of staff General Ray Odierno following a 2007 PKK attack.

Ahmet Davutoglu said his government had been under pressure to retaliate against the KRG.

"We could have destroyed Arbil, but we didn't. Instead, we increased our economic interdependence with the KRG," Davutoglu said, according to a U.S. diplomatic cable dated 2010 and released by Wikileaks.

Apart from providing the landlocked Kurds with an outlet to global markets, Turkey is a crucial ally for Arbil in a hostile region following the withdrawal of U.S. troops from Iraq.

"It's driven by a sense of mutual need on both sides," said Cagaptay. "Turkey and the Kurds need each other and I think that's going to persist in the long-term".

TRADE THREAT

At Turkey's Ceyhan, three storage tanks, each with a capacity of 2.5 million barrels, have been set aside for Kurdish oil, and industry sources say around 300,000 barrels have flowed into them so far.

The KRG has already issued a tender to sell 2 million barrels by the end of January.

The Kurds insist on selling crude independently of SOMO, which Baghdad says has exclusive rights to manage all sales of Iraqi oil.

SOMO officials have traveled to Turkey along with the head of Iraq's state-run North Oil Company to meet the deputy energy minister.

Iraqi Oil Minister Abdul Kareem Luaibi said last week Baghdad was preparing legal action against Ankara and would consider cancelling all contracts with Turkish firms if exports went ahead, putting $12 billion worth of bilateral trade a year in jeopardy.

Kurdistan used to feed crude into a Baghdad-controlled pipeline to Ceyhan, but stopped a year ago due to a row over payments.

Since then, the Kurds have been trucking smaller quantities of oil to Turkey and collecting the revenues themselves, while laying their own pipeline, which was completed late last year.